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Articles from The Business Forum Journal

By Guy Baker


Do you have a Plan Investment Policy?

Under the standards for fiduciaries, it is considered wise to have an investment policy statement. Yet an ISP has multiple meanings to most employers. In my experience, I find most employers would rather not have a 401(k) plan.  The see it as an expense and nuisance. Yet, competitive wage pressures have virtually mandated the plans for most companies. Now added to this pressure, is the need to offer multiple investment choices, monitor these choices for investment value, educate the employees on how to use the plan and make certain the plan complies with the law. What’s wrong with this picture?

The marketplace has become very competitive with “purveyors of value.” It is presumed that if you have a slick brochure, a wide selection of funds, a competitive cost and a good name, that all is well. But is it? Do the trustees of the plan really meet the fiduciary requirements under the law. According to the law, a fiduciary is a person or institution in whom you have placed trust and confidence. The term fiduciary is generic and refers to numerous arrangements in which one might place trust and confidence in another.

You must show that you undertook whatever steps were necessary to ensure that the investment options you provided were not under performing funds when you selected them. Unfortunately, many companies fail to document the steps they have taken--the reasons why they picked this investment over that one. If sued by disgruntled employees, those companies may find that 404(c) offers no protection.

Too often, in fact, fiduciary issues take second place to other worries. Employee benefits tend to be back burner issues. Senior management is more concerned with long-term planning issues than being concerned about their employee’s 401(k) plan.

If sued for an under performing investment, these companies may be hard-pressed to mount an effective defense. The reason is twofold. For starters, a finance executive handling pension investments is held to a higher legal standard of performance than one handling corporate investments. Secondly, the executive is held to the prudent-person standard. Under ERISA, however, the prudent-person standard is not sufficient because there is expert advice available to the company.

The ERISA standard is much higher than for the trustee of a trust, for example. Companies fail to realize that there is no higher standard of strict liability than that imposed under ERISA. Ironically, even if you're acting in good faith, you may not be acting in the best interests of the plan participants.  There is often an inherent tension between administration support, plan costs, relationships, etc. You must manage a pension plan for the benefit of participants and not for the company. These are mutually exclusive.

Consider the two fiduciary liability class-action suits, totaling more than $300 million, against First Union Corp., a Charlotte, North Carolina based financial institution. The suits, filed on behalf of some 100,000 current and former First Union 401(k) plan participants, accuse the bank of using their retirement plan to boost corporate profits at their expense. The plaintiffs allege First Union forced employees to invest their money exclusively in its own mutual funds, which have performed poorly in comparison with other mutual funds. "First Union is using its employees' money to increase the size of its funds to make them more attractive to outside investors," says Michael D. Lieder, a partner at law firm Sprenger & Lang Pllc, in Washington, D.C. "They have required employees to shop only at the company store."

First Union's pension plan, with $3 billion in assets, is also its largest client. The lawsuits also claim First Union charged higher fees and expenses to its employees to service the plan than it charges outside clients. (For a closer look at the cases, see "When Pensions Change Hands," CFO, August 1999).

The lesson is this relates less to First Union’s exposure and more to the positioning of the case. The plan Fiduciaries are being held accountable for their mismanagement of participant funds. The “how” is less important.

As employers, you must be able to make a documented defense that you took into consideration the various factors affecting the well being of the plan  - this includes proper compliance, investment selection, plan costs and record keeping. If your plan is not meeting the benchmark standards for these areas of concern, then you may be at risk.

If a fiduciary is sued in an ERISA case and loses, the full extent of his or her wealth is at risk, whereas with corporate investments, an executive has no personal liability. Indeed, it was the government's intent in drafting ERISA to utilize personal liability as the law's teeth. Who is a fiduciary?  Anyone who has anything to do with the plan. This is not something you take lightly.

About the Author:

Guy is a Fellow of The Business Forum Association.  He is Managing Director of BMI Consulting, a national consulting group with offices in 20 major cities.  He recently founded the Business Success Institute formed to train agents to be fee consultants for business succession planning.  He is also Managing Director of ALIMO a vertical and senior life settlement marketing company headquartered in San Antonio Texas. 

Guy graduated from Claremont McKenna College (BS/Economics-1967) and the University of Southern California (MBA Finance-1968).  Guy earned the Chartered Life Underwriter (CLU) in 1972 and Chartered Financial Consultant in 1981.  He also holds a Master’s degree in Financial Services (MSFS), a Masters in Management (MSM) and an RHU (Registered Health Underwriter).  He is also a Certified Family Wealth Counselor (CRWC).

A frequent writer and speaker, Guy has spoken all over the world.  He has written five books,  including “Why People Buy,” “Investment Alchemy” and “Baker’s Dozen - 13 Principles for Financial Success.”  The BOX™, an easy to understand discussion about the fundamentals of life insurance, has sold over 50,000 copies.   In addition, he has developed an 8 cassette business training album, called “Market Tune-up”, to assist professional agents in their quest to increase sales productivity.

Previous articles by Guy Baker:

Are you at risk as a Fiduciary?
Should I have a Broker

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